Govt proposes Rp 6t for setting up insurance deposit body

Urip Hudiono, The Jakarta Post, Jakarta

The government has proposed to the House of Representatives a Rp 6 trillion (US$642 million) budget for the establishment of the Insurance Deposit Agency (LPS), which will implement the government's future blanket guarantee on bank liabilities.

Speaking on Thursday during a hearing with House Commission XI for financial affairs, the Ministry of Finance's director general for financial institutions, Darmin Nasution, said the money would cover the agency's financial needs in its initial operating year and help it implement the blanket guarantee scheme.

"The LPS needs an initial setup fund of between Rp 4 trillion and Rp 8 trillion, but Rp 6 trillion would be optimum," he said.

Darmin said if the LPS received Rp 4 trillion in initial setup funds, the agency would experience a deficit of some Rp 75 billion in its first year.

He said the LPS would need some 21 years to accumulate sufficient reserves to covering third-party liabilities at the country's banks, which as of last year amounted to Rp 963.1 trillion.

With Rp 6 trillion, the LPS would already have a reserve of some Rp 75 billion and would only need some 19 years to reach a sufficient blanket guarantee reserve.

"Such an initial fund would therefore make the LPS strong enough to gain the trust of the public and the country's banking industry," he said.

The money itself, Darmin said, would come from a government account at the central bank, which currently holds Rp 9.7 trillion in cash reserves the government has been using for its existing blanket guarantee program.

Upon its establishment, the LPS will also charge all banks an annual flat premium fee of 0.2 percent of third-party funds. Currently, the premium fee is 0.25 percent, which generates some Rp 2 trillion annually.

Law No. 24/2004 on the LPS will take effect this Sept. 22. The law stipulates the establishment of the agency and the eventual phasing out of the government's existing blanket guarantee program for all savings and deposit accounts.

Starting March 22, 2006, the LPS will only guarantee accounts amounting to Rp 5 billion, which will be reduced to Rp 1 billion on Sept. 22, 2006, and Rp 100 million on March 22, 2007.

House Commission XI chairman Paskah Suzetta said the commission in principle agreed with the government's argument for LPS' Rp 6 trillion initial setup fund, but would hold another hearing on Monday before reaching a decision.

The government introduced its costly blanket guarantee scheme when depositors rushed banks to withdraw their money during the 1997-1998 Asian financial crisis.

Although the scheme helped to restore the public's trust in banks, it put a strain on the cash-strapped government. Many experts have also said it tends to encourage bankers to neglect prudent banking practices, because they know the government will cover their liabilities should their banks go under.